MAY 2011 BAD FAITH CASES COURT DENIES MOTION TO DISMISS BAD FAITH CLAIM WITHOUT PREJUDICE AFTER DETERMINING THAT DISCOVERY IS NECESSARY BASED ON THE INSURED’S ALLEGED FACTS (Western District)

In K2 Settlement v. Certain Underwriters at Lloyd’s, the insured was a limited liability company that agreed to an insurance bond contract with the insurer whereby the insurer would indemnify the insured against certain risks.  The insured eventually suffered a loss after it purchased the assets of a corporation engaged in the title business, as the president of the purchased corporation supposedly made unauthorized withdrawals from the corporation’s escrow account and tried to cover those losses with money from the insured’s escrow account.

The insured submitted claims for over $250,000 in losses to the insurer, but the insurer denied the claim.  The insured then filed a Complaint, alleging that the insurer acted in violation of Pennsylvania’s Bad Faith Statute, 42 Pa. C.S. § 8371, when denying its claim.  The insurer then filed a Motion to Dismiss the claim, arguing that the insurance bond contract did not cover losses caused by “former employees of merged, consolidated or purchased institutions.”  The insured responded to that allegation by claiming that it and the other corporation were neither merged nor consolidated entities, and that the insurer ignored the fact that the other company’s president was hired by the insured and served as its president and employee when she caused the losses to the insured.

The court acknowledged under Bell Atlantic Corp. v. Twombly that it could not dismiss a case “merely because it appears unlikely or improbable that plaintiff can prove the facts alleged or ultimately prevail on the merits,” and instead it could only dismiss the case if, in the view of the alleged facts, it could not reasonably conceive that the insurer could establish a case that would entitle it to relief.  Based on this standard, the court determined that it would be premature to dismiss the insured’s claims without the benefit of discovery, and it therefore denied the insurer’s motion to dismiss, without prejudice.

Date of Decision:  April 27, 2011

K2 Settlement v. Certain Underwriters at Lloyd’s, Civil Action No. 11-0191, United States District Court for the Western District of Pennsylvania, 2011 U.S. Dist. LEXIS 45273 (Apr. 27, 2011) (Lancaster, J.)